How Does a Consumer Proposal Affect My Credit Rating?

Brett Luckin, Licensed Insolvency Trustee
Written by: Brett Luckin, Licensed Insolvency Trustee

When you file a consumer proposal you are telling all of your creditors you can no longer pay them the amount you borrowed. The disadvantage of a consumer proposal can be related to your credit score, as it will be damaged and you will have either an R7 or an R9 credit rating – depending on how you handle your different debts. However, you may want to look at your credit score to determine if it has already been severally damaged by unpaid, late or delinquent accounts on your file.

On our credit report in Canada, each creditor assigns a credit score on a scale from 1 to 9. R1 is the best credit rating and R9 is the worst. Here are their meanings:

  • R1 – You pay that creditor’s loan on time.
  • R2 – Your payments are 30 days late.
  • R3 – Your payments are 60 days late.
  • R4 – Your payments are 90 days late.
  • R5 – Your payments are 120 days late.
  • R6 – Typically not used.
  • R7 – You are in a consumer proposal, consolidation order, or debt management plan (offered through a non-profit credit counselor).
  • R8 – It is used to show that a secured creditor has taken steps to realize on their security (e.g. repossessed your car). It rarely appears on a credit bureau report as after they take your car they generally commence legal or collection action which is rated R9.
  • R9 – You are bankrupt. A bad debt placed for collection or considered un-collectible, or you are bankrupt.

How long does a proposal stay on my credit record?

Transunion and Equifax state that it will take 3 years for a consumer proposal to fall off your credit score after it has been completed. So if your proposal takes you 4 years to pay, then your score will be damaged for 7 years in total. If you are able to pay off your proposal quicker than your credit rating after a consumer proposal will get better faster. The key is that it will stay on your credit bureau for 3 years from completion.

Should I worry about the effect on my credit rating?

Obviously, an R7 rating in a consumer proposal is much worse than a perfect R1 credit rating, so that is an obvious disadvantage of a consumer proposal.

However, if you are considering filing a consumer proposal, you probably already have less than perfect credit. You probably are either worried about falling behind on your payments, or you are already behind and worried about collection calls and wage garnishments. Your credit has already deteriorated to the point that you don’t qualify for a debt consolidation loan.

While a consumer proposal has a negative effect on your credit score, it also means that you have dealt with all of your debts! You have a plan in place to deal with your creditors. You are no longer worried about collection calls and wage garnishments. You can sleep at night.

Contact a Licensed Consumer Proposal Administrator for a free consultation. They will explain the options available to you in your specific situation, and answer your questions. There is no risk in talking with them.

Tips for credit rebuilding after a consumer proposal

Another question is how long will it take to fix your credit? Unfortunately, the only way to fix your credit score is to start borrowing money again. If you are in a consumer proposal than getting more debt may not be the best idea. However, credit is vital to function in our society. Here are some tips that you can do to rebuild your credit.

#1 – Set up a budget

Your Trustee will have put together an income and expense statement with you. It is your job to make sure you track your spending diligently. The key to budgeting is to set aside money for your fixed and variable costs every month. You also need to save money for rainy days when something may not go according to plan. Lastly is to get at least $1,000 set aside for emergencies. Once you have this money put aside and your budget working you can begin credit rebuilding.

#2 – Establish Two New Lines Of Credit

Now that you have your budget under control you are ready to rebuild credit – rebuilding means taking it from an R7 rating to a R5 or lower. While you can start to rebuild credit even if you are in a bankruptcy or a consumer proposal, your rating will not improve until you have completed your proposal.

How do you rebuild? – There are 2 types of credit in our society:

  • Revolving Credit

    Revolving credit is defined as an open credit facility. It is credit that is constantly available to use. These would include credit cards, or lines of credit. The credit unions will report your payment history every month on a scale of 0 – 9. A 0 means you have no payment history, whereas 1, 2, 3, 4, 5 means you pay your payments within 30, 60, 90, 120 respectively. An R6 rating means you are in collections, whereas R7 is a consumer proposal and R9 is bankruptcy.

    While in a consumer proposal you can still get a secured credit card through select financial institutions. A secured card will make you deposit a small amount and then you can borrow money. Make sure you only get a $500 limit to start, and check the cost of the card. It will likely cost you $59 -$69 per month to use the card. You are also going to have to pay it off within the 21 day grace period to avoid the high interest. If you use the card every month and pay it off you will see your score improving.

  • Installment Credit

    Installment credit is defined as a payment arrangement with a lender over a set period of time. This includes a mortgage, car loan, or other type of loan. Installment credit is going to cost you more as they are going to assess you based on your credit score. An example of this is a car loan, where the lender will give you a loan but they will take the car as collateral. This set payment will be reported to the credit bureau every month and your score will begin to improve. Some other tips to get installment credit are to apply for things like an RRSP loan, or a GIC loan. Banks or lenders will be happy to lend you money on these as they are getting a good interest rate.

    Once you have established these two lines of credit, and you have waited for more than 2 years after your proposal is paid off you will be able to qualify for a mortgage with your bad credit score in the past.

#3 – Keep Payments Current

Now that you have done all the hard work it is imperative that you maintain all of your payments. This includes your utilities, cell phones, and any debt payments you have started.

Another tip is to have savings in the bank. If you have a large savings account then your banker will see that you have assets, and he may give you a better interest rate.

How much does it cost to check my credit score?

By law a credit bureau has to provide you with a free copy of any information on your credit report. However, this free version is only available if you mail to them a request and they will mail you a copy. This takes time. If you go online, to either Equifax or Transunion’s website, you can pay for a quick version and see the credit score in real time.

These reports have more information along with the score, so it is recommended to get them after your proposal is completed to see who is still reporting it on there.

These are private companies and if you find there are errors in your score you can write them a letter to correct it. It is advisable to check them every year at minimum.

Can I pay to fix my credit?

The short answer is no. As outlined above fixing your score is going to take work. There are companies that will charge you money to help you with the process and work outlined above. However, if you follow this guide you will be well on your way to getting your score back to where it was before you filed your proposal.

As your credit improves you will be allowed to borrow more money and get better interest rates. Initially, there will be high risk lenders that will charge you higher rates than regular financial institutions. Keep in mind that it was debt that got you in trouble in the first place. So stick to the above tips and you will be well on your way to a higher credit rating.

A consumer proposal is a great solution for many Canadians struggling to get out of debt who have some income.  Each situation is different so we suggest you contact a Licensed Insolvency Trustee to arrange for a no-charge initial consultation to review all of your options.